1. Introduction

• In the economy of a country as a whole will appear that the output levels of all the goods and services in the economy tend to move together.
• The prices of different goods and services generally tend to rise or fall simultaneously.
• The employment level in different production units also goes up or down together.
• If aggregate output level, price level or employment level in the different production units of an economy, bear a close relationship to each other then the task of analysing the entire economy becomes relatively easy.
• Instead of dealing with the above-mentioned variables at individual levels, we can think of a single good as representative of all the goods and services produced within the economy.
• This representative good will have a level of production which will correspond to the average production level of all goods and services.
• Similarly, the price or employment level of this representative good will reflect the general price and employment level of the economy.
• In macroeconomics, the analysis of how the country’s total production and the level of employment are related to attributes (Called variables) like prices, rate of interest, wage rates, profits and so on, by focusing on a single imaginary commodity and what happens to it.
• We are unable to afford this simplification and thus usefully abstain from studying what happens to the many real commodities that are bought and sold in the market.
• Because we generally see what happens to the prices, interests, wages profits etc. For one commodity more or less also happens for the others.
• Particularly, when these attributes start changing fast, like when prices are going up or employment and production levels are going down.
• The general directions of the movements of these variables for all the individual commodities are usually of the same kind as are seen for the aggregates for the economy as a whole.
• While moving away from different goods and focusing on a representative good may be convenient, in the process.
• The overlooking some vital distinctive characteristics of individual goods, for example, the production conditions of agricultural and industrial commodities are different.
• Treating a single category of labour as a representative of all kinds of labour, we may be unable to distinguish the labour of the manager of a firm from the labour of the accountant of the firm.
• Instead of a single representative category of goods (or labour or production technology), we may take a handful of different kinds of goods.
• Three general kinds of commodities may be taken as a representative of all commodities being produced within the economy; agricultural goods, industrial goods and services.
• These goods may have different production technology and different prices.
• Macroeconomics also tries to analyse how the individual output levels, prices and employment levels of these different goods get determined.
• Microeconomics was a study of individual markets of demand and supply and the players, or the decision-makers were also individuals (buyers or sellers, even companies) who were also individuals (buyers or sellers, even companies) who were seen as trying to maximize their profits (as producers or sellers) and their satisfaction or welfare levels (as consumers).
• Even a large company was micro in the sense that it had to act in the interest of its shareholders which was not necessarily the interest of the country as a whole.
• For microeconomics, the macro (meaning large) phenomena affecting the economy as a whole, like inflation or unemployment, were either not mentioned or were taken as given.
• These were not variables that individual buyers or sellers could change.
• The nearest that microeconomics got to macroeconomics was when it looked at General equilibrium, meaning the equilibrium of supply and demand in each market in the economy.

Economic Agents

• By economic units or economic agents, we mean those individuals or institutions which make economic decisions.
• They can be consumers who decide what and how much to consume.
• They may be producers of goods and services who decide what and how much to produce.
• They may be entities like the government, corporations, and banks which also make different economic decisions like how much to spend, what interest rate to charge on the credits, how much to tax etc.
• Macroeconomics tries to address situations facing the economy as a whole.
• Adam Smith, the founding father of modern economics suggested that if the buyers and sellers in each market take their decisions following only their self-interest, economists will not need to think of the wealth and welfare of the country as a whole separately.
• But economists gradually discovered that they had to look further.
• Economists found that first, in some cases, the markets did not exist.
• Secondly, in some other cases, the markets existed but failed to produce an equilibrium of demand and supply.
• Thirdly in a large number of situations society (or the state, or the people as a whole) had decided to pursue certain important social goals unselfishly (in areas like employment, administration, defence, education and health).
• Some of the aggregate effects of the microeconomic decisions made by the individual economic agents needed to be modified.
• Macroeconomists had to study the effects in the markets of taxation and other budgetary policies and policies for bringing about changes in money supply, the rate of interest, wages, employment and output.
• Macroeconomics has deep roots in microeconomics because it has to study the aggregate effects of the forces of demand and supply in the markets.
• In a developing country like India, such choices have to be made to remove or reduce unemployment.
• To improve access to education and primary health care for all, to provide food administration and sufficiently for the defence of the country and so on.
• Macroeconomic policies are pursued by the state itself or statutory bodies like the Reserve Bank of India, SEBI and similar institutions.
• Each such body will have one or more public goals to pursue as defined by law or the Constitution of India itself.
• These goals are not those of individual economic agents maximizing their private profit or welfare.
• Thus the macroeconomic agents are different from the individual decision-makers.
• Secondly, the decision-makers of macroeconomics often have to go beyond economic objectives and try to direct the deployment of economic resources for such public needs.
• The activities are not aimed at serving individual self-interests.
• They have pursued the welfare of the country and its people as a whole.

2. Emergency of Macroeconomics

• Macroeconomics as a separate branch of economics emerged after the British economist John Maynard Keynes published his celebrated book The General Theory of Employment, Interest and Money in 1936.
• The dominant thinking in economics before Keynes was that all the labourers who were ready to work would find employment and all the factories would be working at their full capacity.
• This school of thought is known as the classical tradition.
• The Great Depression of 1929 and the subsequent years saw the output and employment levels in the countries of Europe and North America fall by huge amounts.

Unemployment rate

• The number of people who are not working and are looking for jobs is divided by the total number of people who are working and are looking for jobs divided by the total number of people who are working or looking for jobs.
• The rise in unemployment and fall in aggregate output made economists about the functioning of the economy in a new way.
• Keynes's approach was to examine the workings of the economy in its entirety and examine the interdependence of the different sectors. The subject of macroeconomics was born.

3. Context of the Present Book of Macroeconomics

A Capitalist economy can be defined as an economy in which most of the economic activities have the following characteristics

• There is private ownership of means of production
• Production takes place for selling the output in the market
• There is the sale and purchase of labour services at a price which is called the wage rate (The labour which is sold and purchased against wages is referred to as wage labour).
• In both developed and developing countries, apart from the private capitalist sector, there is the institution of the state.
• The role of the state includes farming laws, enforcing them and delivering justice.
• The state undertakes production apart from imposing taxes and spending money on building public infrastructure, running schools, and colleges, providing health services etc.
• These economic functions of the state have to be taken into account in the country’s economy.
• For convenience shall use the term government to denote state.
• Apart from the firms and the government, there is another major sector in an economy called the household sector.
• A single individual who makes decisions relating to her consumption or a group of individuals for whose decisions relating to consumption are jointly determined.
• The countries of the world are also engaged in external trade. The external sector is the fourth most important sector.

Trade with the external sector can be of two kinds.

1. The domestic country may sell goods to the rest of the world (Exports)
2. The economy may also buy goods from the rest of the world (Imports).
3. Capital from foreign countries may flow into the domestic country or vice versa.